You have a business idea that you feel passionate about, you have impressed your friends and family with your elevator pitch, and now you feel ready to make the leap from employee to business owner. Alternatively, perhaps you have already started a business, have had real early success and now, as your business grows and matures, legal consideration are becoming a practical reality. In this briefing we look at the top ten legal issues that a potential business owner should consider in the early days of a technology business; the ten things which can make all the difference between failure and success.

1.Practical Considerations: Plan ahead to avoid legal issues arising

There are many practical hurdles to overcome when setting up a company. If these practical hurdles are not dealt with properly they can create legal issues that take time and cost more to resolve than had they been dealt with properly at the outset.

The scope of this briefing is limited so we can’t set out all those considerations here. However, careful thought should be given to what those tasks are that can act as bottlenecks and cause issues down the line. For example, founders always tell us that opening a business bank account can be harder than opening a personal bank account.

If your business needs a physical site, you will need to think about what kind of commitment you want to enter into. Speaking to a property lawyer will help you understand the difference between taking a lease and a license of a space.

Certain insurance is legally required (e.g. employer’s liability insurance for any employees) and other insurance is advised (e.g. public liability insurance). Speaking to an insurance broker will help you identify what cover you require and the right level of cover.

2.Structure: Choosing a Business Structure; a limited company, partnership or a sole trader?

An area often overlooked in the early planning stages of a new business is the optimal business structure i.e. deciding whether your business will operate as a limited company, a partnership, or as a sole trader.

In the tech space, limited companies are most commonly seen for three reasons:

• i.Flexibility
  Limited companies have separate ‘legal personality’. They can own property, borrow money, and enter into contracts in their own name making them a practical choice;
• ii.Fundraising
  Most companies need capital to grow. Capital can come in the form of debt (i.e. loans) or equity (cash injections in exchange for an interest in the business). Limited companies have shares (denoting ownership). In the tech space it is common for investors to inject cash in exchange for a percentage of your business. Third party investors (such as angel investors, venture capital partners and private equity investors) are familiar with limited company structures and like to take shares in return for their capital injections. Other structures are possible, such as partnerships, but these can offer less flexibility; and
• iii.Liability
  The owners of limited companies can limit their liability to their initial capital contribution so third parties cannot seek to recover debts owed to it by the company from its shareholders (or directors). Tax is also a relevant factor when determining the best company structuring (as each structure attracts a different tax treatment). It is therefore sensible to check your preferred structure with your tax advisor. If you do decide to set up an entity through which you operate your business you will have certain on-going and annual record-keeping and filing obligations. If desired, these can be outsourced to a third-party corporate service provider or to a law firm or they can be done in-house. Accounts will also need to be drawn-up each year (also to be done internally or outsourced).

3.Partners: Document in writing relationships between Founders and Investors

This one always surprises us. It’s amazing how often we see early stage companies fail because of a fundamental lack of understanding between founders and between founders and investors. Our view is that if there is more than one investor or founder in the picture it is always advisable to set out the various rights and obligations of those persons in a binding agreement.

If the business is a limited company a shareholders’ agreement will be the best place to document these obligations because (unlike the company’s articles of association) this agreement can be kept private between the parties. Setting out the parties’ clear expectations at a business’ inception can avoid disputes further down the line (just think of the famous fall out between Mark Zuckerberg and the Winklevoss twins). A partnership agreement would be the equivalent document for a partnership. You should see this document like a corporate prenup.

One of our corporate lawyers will happily talk you through what a typical shareholders’ agreement looks like and its many benefits. In any event, you can expect such agreement to address the following issues: vesting (ownership of shares linked to certain conditions or to the passage of time); future share ownership (i.e. right of first refusal or pre-emption rights); drag and tag rights; non-compete and confidentiality obligations; deadlock resolutions; director appointment; and casting votes.

4.Name: coming up with a name and a brand

Amazon founder, Jeff Bezos, is quoted as saying “a brand for a company is like a reputation for a person”. Indeed, that’s certainly how we think in our business – Garfield Smith : Technology & Data Lawyers.

Selecting the best name and branding for your business is important. But before getting your heart set on a name you should run a few quick checks first. They are:

• i.A company name search at Companies House to see if another U.K. business has already registered your desired company name;
• ii.A trademark registration search at UK Intellectual Property Office to see if other business has registered your preferred company name; and
• iii.A search engine check for existing websites and businesses.

If you have international expansion in mind, you will want to avoid choosing a business name which is being used in a country where you would like to eventually operate as, chances are, you won’t be able to use your domestic existing name. These searches take a few minutes and are free.

By carrying out advance checks you can avoid choosing a name that already exists or which would not be permitted. A list of non-permitted words can be found on the UK Government’s website.

Once you have settled on a name you should register it at Companies House to prevent another person registering that exact name (this provides U.K. coverage only) noting that such registration cannot prevent others using the name as a trading name unless you also obtain trademark protection.

We advise using a qualified trade mark attorney to do that and can put you in touch with one if you ask us.

5.Agreements: Key Contracts and Policies

Our view is that a top priority should be investing in creating standard form, template agreements early on in a businesses life which can then be used as the starting point for contract negotiations with suppliers and customers.

This investment will create long-run efficiencies (from a cost and time perspective) and will help your business enter into (mostly) standardised agreements ensuring contractual consistency and minimising the chances of missing important terms (e.g. a key exclusivity clause). As an added incentive, an investor doing due diligence on your business further down the line will only be impressed if they see you have a controlled system in place for contracting as this will be a key indicator that you run a serious and professional business operation.

Consider also if you need to have a non-disclosure agreement in your tool-box. A standalone confidentiality agreement can have real value for businesses that need to protect their secret-sauce, or where sensitive financial, sales or technical data is to be shared with third parties.

In addition to having standardised agreements, your business will also need to draft and maintain certain policies. Consider a website (and mobile app) terms of use, a privacy policy (i.e. statement about your personal data usage) and a cookies policy as a minimum.

As your business grows other policies may also become required, for example, a Modern Slavery Statement. Other optional but good and sensible to have policies you might consider include a business code and ethics policy, an anti-discrimination and inclusion policy, an anti-bribery policy and an environmental and sustainability policy.

6.Employees: Delegating and deciding on the right category of worker for your business

When we ask “what would you have done differently?” about the business they set up to many entrepreneurs they consistently respond along the lines of not learning to delegate sooner. Equally many tech-entrepreneurs have credited their business’ success to the quality of their team. Steve Jobs, co-founder of Apple, once said: “we hire smart people so that they can tell us what to do”. As your business grows you will need to know in advance how, when, and what work you will delegate to others.

Help can be found in the form of (part or full-time) employees, consultants / contractors, and third-party service providers.

If you decide to hire employees, this will have tax and registration consequences and you will need to comply with applicable employment law. Factors to consider when deciding to hire employees include:

• i.Ensuring employees have the legal right to work in the U.K. Some may need other pre-employment checks too such as a DBS check;
• ii.Putting in place employers’ liability insurance;
• iii.Notifying HM Revenue & Customs and registering your business as an employing entity;
• iv.Making National Insurance contributions and paying salary at least the national minimum wage via PAYE;
• v.Checking if you need to automatically enrol your employees into a workplace pension scheme; and
• vi.Issuing an employment contracts containing key details, such as job description, working hours, salary, holidays, benefits, intellectual property ownership and confidentiality.

Note that, by default, anything created for you by an employee (or contractor) will be owned by that person so you will need to include an assignment provision in the applicable contract to counter this presumption; this could be important, for example, if you engage a developer to write the code for your key business asset.

You may decide you don’t want to hire employees initially and instead rely on gig-workers. If this is the case, ensure you do not inadvertently engage the services of a consultant or contractor but encourage/allow them to provide services in such a way that they become employees. One only has to witness the various legal tussles of some gig economy tech companies to realise how important this is to get right.

Whilst you should always seek specific legal advice from us in relation to this, the following is a non-exhaustive list of do’s and don’ts to help minimise the risk that contractors inadvertently becoming employees.

They are:

• i.Do clearly define the hours that they work;
• ii.Don’t always expect them to accept work when offered;
• iii.Don’t prohibit them from turning work down;
• iv.Don’t provide your equipment rather than allowing them to use their own; and
• v.Don’t tell them they can only work for your business; Don’t always pay them via payroll.

7.Data: How you collect it, how you use it and how you protect and store it

The topic of companies collecting and using personal data (being information which allows a living person to be directly, or indirectly, identified from that data) has taken a more prominent position in the collective psyche recently partly because of some high-profile cases involving companies like Facebook (the Cambridge Analytica data breach) but also because the law is quickly evolving in this area.

In the European Union, the General Data Protection Regulation (“GDPR”) came into force in May 2018. The GDPR establishes seven principles of data collection. They are:

• i.Lawfulness, fairness and transparency;
• ii.Purpose limitation;
• iii.Data minimisation;
• iv.Accuracy;
• v.Storage limitation;
• vi.Integrity and confidentiality (security); and
• vii.Accountability.

Any business (or individual) that processes personal data in the course of a business will need to comply with the GDPR and to register with the Information Commissioner’s Office and to pay a fee to the ICO.

Compliance with the GDPR is not only mandatory but it is important because data subjects are increasingly aware of their rights and are becoming more comfortable at enforcing these. Fines for non-compliance have risen (a breach of the GDPR could result in maximum fine of the greater of €20 million or 4% of global annual turnover) and businesses involved in data scandals often suffer severe reputational damage by loss of customer confidence.

Practical steps to ensure your business complies with the GDPR (and other applicable data legislation) includes making sure that only the bare minimum personal data is collected and that robust security measures are in place to protect the integrity of stored data.

If your business will be data driven, speak to one of our expert data protection lawyers about what you can do to become GDPR-proof. We may advise you on establishing compliance through the establishment of data processing policies for your business. We could also assist you with entering into data processing agreements with third parties that receive your personal data and you may also be told you must appoint a data protection officer (which is mandatory in certain instances such as where core business activities consist of operations with large scale, regular and systematic data monitoring).

8.Intellectual Property: Protecting the value of your idea from others

Intellectual Property (“IP”) is the generic name given to the ownership of ideas and inventions, such as product design, logos, names, and images. Depending on your business, some elements will be likely capable of IP protection. The most typical forms of IP in tech businesses are patents (to protect an invention), trademarks (to protect a combination of words, sounds, or logos – such as the red ‘N’ and the ‘ta-dum’ sound owned and registered by Netflix), copyrights (to protect artistic work such as computer programs) and industrial design (to protect the distinctive physical attributes of a product, such as the Apple iPhone). The reason for looking into IP protection at an early stage is twofold:

• i.Offensive
  Obtaining IP protection for your business assets prevents third parties from replicating your product and cannibalising your sales; and
• ii.Defensive
  Checking no third parties have already registered IP for products identical to your idea, product, or name reduces the chances you inadvertently infringe third party registered IP.

Checking no third parties have already registered IP for products identical to your idea, product, or name reduces the chances you inadvertently infringe third party registered IP.

In addition to securing IP protection, it is important to ensure you have appropriate permissions before using a third party’s IP such as music or video content in business materials.

We would be happy to review your IP and assist you in putting together an IP protection strategy. Where necessary we can also introduce you to relevant subject matter experts such as Patent and Trade Mark attorneys.

9.Compliance: Knowing what laws (and taxes) apply to your business and abiding by them

Depending on the nature of your business, before you start you may need to apply for certain permits, licenses, and permissions to comply with applicable laws. Legal advice should be sought to ascertain what authorisations may be required. For example, a tech business seeking to provide credit would need to obtain a Financial Conduct Authority authorisation as this activity constitutes a regulated financial service.

Certain taxes will be payable by your businesses (e.g. in 2020/21 a 19% corporation tax applies for companies’ profits and VAT registration is required for taxable turnover of £85,000 and more). You’ll need to know what these are too. Your accountant should be able to help with this.

Finally, when up and running and on a day-to-day basis your business needs to comply with all applicable regulations and laws. These will include health and safety legislation, employment law (for employers), anti-bribery legislation, etc.

We have great experience in a number of different industry sectors and can assist you to understand what laws apply to your business so as to avoid fines and, in some cases, criminal liability.

10.Ecosystems: The professional business and advisors network

Having a network of trusted advisors (lawyers, accountants and tax advisor) will help the set-up process run smoothly and will ensure you put your best foot forward from the outset. Investing in building these relationships early on will pay off in the long run. You should also keep one eye on the kind of investors you would like to attract for your business later on and attend events where you will come across them so that you are making sure that your business is on their radar.

Conclusion

In summary, there are many elements that go into setting up a business and in creating strong foundations for a successful company. If you are reading this briefing because you are thinking about starting your own tech business or are in the early stages of running your new tech business, please get in touch by email or phone. Our contact details are set out below. With many years of experience in advising tech start-up companies, from inception through to exit, we are well placed to help you achieve your business goals.